Bankers see huge challenges in next financial year

February 04, 2010 03:02 IST

The country's leading bankers are optimistic about the long-term prospects but are unanimous in their opinion that the next financial year will be challenging.

The biggest challenge was the large government borrowings that are likely next year to finance the government's fiscal deficit, bankers said at the Business Standard Banking Round Table in Mumbai on Tuesday. According to initial estimates put out by the government, the fiscal deficit will be 5.5 per cent of gross domestic product.

At the same time, the demand for funds from the private sector will also increase as economic activity picks up. Union Bank of India Chairman and Managing Director M V Nair said considering the government borrowing programme, managing liquidity was going to be a critical issue. Nair estimated that loan disbursals would grow by around 25 per cent next year.

The bond market has already turned bearish amid apprehensions over the coming year's borrowing programme. The yield on the 10-year benchmark paper (6.35 per cent 2020) hardened to 7.69 per cent at close of trading today. It was up 11 basis points over closing yield of 7.58 per cent on January 29 when RBI announced its third quarter review of the monetary policy. The inflationary pressures are also weighing on the yields, dealers said. RBI has raised the inflation estimate to 8.5 per cent for March 2010.

Axis Bank Managing Director & CEO Shikha Sharma said "Next year, if we still have a large government borrowing programme, if we get the economic growth and if credit growth picks up, it is going to be very challenging to maintain the balance. If 2009 was about waiting for growth, next year is going to be about balance and managing volatility."

ICICI Bank Managing Director & CEO Chanda Kochhar added that at present companies were depending on internal accruals, funds raised through equity issues and foreign direct investment to meet their funding needs. Gradually, loans that have been sanctioned will be drawn and credit growth will pick up.

"In the last seven-eight years, there was very little industrial activity, so we were funding consumption growth. This is the time both investment and consumption growth are going to be there. So we have to scale up to be able to make use of this opportunity," she added.

Bankers identified infrastructure as one area that will require large doses of funding, with State Bank of India Chairman O P Bhatt saying the fund requirement, which was earlier estimated at $500 billion, was now passé. "We are talking of a trillion-plus expenditure now," he said.

With the cost of funds likely to go up, as RBI raises policy rates in the months ahead, Kochhar said banks also needed to maintain healthy net interest margins (NIM). Bhatt added that any given point of time banks needed a NIM of 2.5-3 per cent.

Standard Chartered CEO for India and South Asia Neeraj Swaroop said regulations, which were being reviewed globally, following the credit crisis, posed the other threat.

In addition, HSBC India CEO Stuart Davis warned that there was still a considerable amount of uncertainty.

Going forward, Sharma said that planning periods will become shorter and companies and banks would have to move to planning on a quarter-on-quarter basis.

Citibank (South Asia) CEO Mark Robinson said in 2010, the biggest challenge is going to be putting in place a platform for the next several years in terms of what we want our banks to look like  the technology, the customer proposition, among other things. "Things like credit bureaus, the shape of the equity markets and financial intermediation are as important as the physical infrastructure are area to be looked at carefully," he said.